Wednesday, June 11, 2014

Wealth redistribution and poverty

Thoughts on taxing the rich: 

The typical left wing solution to any problem is higher income taxes on the rich. In fact, I remain unconvinced that modern liberalism is nothing more than envy wrapped in political rhetoric. For example, here are two issues which leftists think can be fixed by even more taxation of the wealthy:

1. Wealth inequality
>Modern liberal solution: Tax the rich even more
>Classical liberal solution: Privatize social security (thus making everyone an owner of capital)

2. Poverty
>Modern liberal solution: Tax the rich even more (wealth redistribution)
>Classical liberal solution: Grow the economy, 75% of the income gains that accrued to the bottom 40% of income earners worldwide are a result of economic growth according to the World Bank. [1]

Indeed, economic growth is the main driver in poverty reduction and the means through which the standard of living of country's citizens increases. Thus, anything that hinders economic growth is very much against the interests of the poor, as well as everyone else. And of course, a recent survey of the economic literature on government spending and taxation has found that in OECD (developed) countries, taxes are significantly negatively correlated with growth even after controlling for numerous of relevant factors that could affect growth. According to the authors:

"Most studies find increase in government size [taxation or spending as a % of GDP] by 10 percentage points is associated with a 0.5 to 1 percent lower annual growth rate." [2]

For the United States specifically, research conducted by Keynesian economists David and Christina Romer states:

"[W]e find that a tax increase of one percent of GDP lowers GDP by about 3 percent." [3]

It's also worth noting that according to the Fraser Institute, the poor in the most economically free (the most capitalist) countries are better off than the average person in the least economically free countries:

"In the top quartile [of economic freedom], the average income of the poorest 10% was $10,556, compared to $932 in the bottom quartile in 2011US(PPP) dollars (Exhibit 1.9). Interestingly, the average income of the poorest 10% in the most economically free nations is more than twice the overall average income in the least free nations." [4]

Thus, there is good reason to expect that higher taxes on the wealthy could hurt economic growth and thus the poor. There is also good reason to expect economic freedom to be good for the poor. However, I'm not convinced that modern liberals actually want to help the poor. If they did, they would be actively doing something to help them, not trying to reach into other people's pockets to do what they think is right. I think their obsession with taxing the rich is more driven by envy than anything else, that or they wrongly believe in the zero sum game view of the world, in which one man can only gain at the expense of others. Regardless, I seriously doubt much good could come from further taxation of the wealthy (or anyone else) or further degradation of economic freedom (which the US has been experiencing for a decade).






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